Gordon Brown has backed the launch of a public fund to provide debt and equity
investments to fast-growing companies seeking between £2m and £10m but
caught by a "permanent equity gap".

The Prime Minister said a "Growth Capital Fund" would be set up after an independent inquiry into the availability of finance to small and medium-sized companies concluded that action was needed.

The review, by former 3imanaging director Chris Rowlands, found that a "permanent gap" existed for up to "5,000 businesses" looking to raise between £2m and £10m in growth capital and that neither banks nor equity investors were likely to fill this gap in the near future.

Mr Brown did not specify the fund's size but Mr Rowlands said that it would "need scale" to be attract institutional investors. "It's a pretty critical issue," Mr Rowlands said. "Government has got to find a way once and for all to attract private sector capital into this space."

He envisaged a fund in the order of half a billion pounds.

The CBI has led calls for the recreation of a fund along the lines of the post-Second World War Industrial & Commercial Finance Corporation, a bank-financed body that evolved into private equity group 3i.

The review set out three options, including the creation of a new private sector institution with regional offices. Mr Rowlands said that a new 3i was "a possibility" but would take time to set up. "When you are talking about a network it would be three or four offices. It does not have to be hundreds."

He argued that whatever option the Government chose it needed to be overseen by a single "central" fund manager with access to expert investors on the ground outside the South East and with a specific investment mandate.

The review stated that the equity gap would be best tackled with a mezzanine product, a term used for lending that is subordinate to bank debt, but which ranks ahead of equity.

This product "would help address demand side aversion to pure equity, and provide a return above regular bank lending to reward investors" the review stated.

Lord Mandelson, Business Secretary, welcomed the review's findings. "It is now for Government and the market to work together to address these issues effectively. It is vital that UK small and medium sized companies can secure the investment they need to grow," he said.

Mr Rowlands said that the review team had "put a lot of thought" into how the fund could be financed. "Along with pension funds and the insurance sector, the banks are clearly another prime potential source of capital," he said.

Stephen Pegge, director of external affairs at Lloyds commercial bank, said: "We have invested in the Capital for Enterprise Fund and Bridges [Venture Fund] and a number of others. We are always open to looking at these opportunities."